VZCZCXRO4238
PP RUEHHM
DE RUEHHI #1561/01 2421724
ZNR UUUUU ZZH
P 301724Z AUG 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 6226
RUEHGP/AMEMBASSY SINGAPORE PRIORITY 2431
INFO RUEHHM/AMCONSUL HO CHI MINH 3607
RUEHBK/AMEMBASSY BANGKOK 5939
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 HANOI 001561 
 
SIPDIS 
 
DEPT FOR EAP/MLS, EB/IFD, USAID/ANE, USAID EGAT/EG 
BANGKOK PASS TO RDM/A 
DEPT PASS USTR FOR D BISBEE 
SINGAPORE FOR TREASURY S BAKER 
DEPT PLEASE PASS FED RESERVE SAN FRANCISCO FOR A MAYEDA 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN EAID ECON PREL VM
SUBJECT: BUMPS IN THE ROAD FOR VIETNAM'S "EQUITISATION" PROCESS 
 
 
¶1. (U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
 
¶2. (SBU)  SUMMARY:  The auction of shares in insurance company 
BaoViet, Vietnam's largest public offering to date, revealed the 
problems and strategic shortfalls of Vietnam's new method of 
"equitising" State Owned Enterprises (SOEs) (equitisation is the 
Vietnamese term for partial ownership offers of SOEs).  The new 
method, instituted in the spring of 2007, requires charging 
strategic investors a share sale price no less than the average 
price earned at the equitisation auction, even if shares are 
available more cheaply in the market or are subject to other, more 
stringent conditions.  The BaoViet deal was to serve as a flagship 
example of Vietnam's equitisation program, so its failure is being 
carefully reviewed as upcoming equitisations will involve even 
larger SOEs, including important state-owned commercial banks 
(SOCBs).  All eyes are now on the upcoming equitisation of 
Vietcombank as an indication of how Vietnam will move forward with 
the equitisation program.  END SUMMARY. 
 
WHAT WENT WRONG WITH BAOVIET? 
----------------------------- 
 
¶3. (U)  According to a high level official at a local multi-lateral 
development organization who was involved in the BaoViet process, 
the initial auction of BaoViet shares saw retail investors drive up 
share prices to an average of VND 74,000 per share.  The new 
equitisation rules, codified in Decree #109, require strategic 
investors (both foreign and domestic) to pay a share price no less 
than the average initial auction price.  In BaoViet's case, however, 
strategic investors refused to buy their agreed-upon shares because 
the average auction price was twice the level they had been prepared 
to pay.  Vietnamese banks, under pressure from new regulations to 
restrict their lending for stock market purchases to just 3 percent 
of total loans, also balked at lending retail investors money to pay 
for shares at such a high price.  By the deadline to settle and 
claim shares two to three weeks later, the BaoViet stock price was 
down 13.5 per cent in the informal gray market.  Both foreign and 
local bidders opted to forfeit their ten per cent deposits and 
walked away without purchasing their shares.  Government officials 
are still negotiating with strategic investors as to the final price 
they are to pay. 
 
GOVERNMENT WARY OF STRATEGIC INVESTORS 
-------------------------------------- 
 
¶4. (SBU) Government officials acknowledge the value strategic 
investors could bring to bear on SOEs, including the ability to 
catalyze managerial reform, improve corporate governance and 
discipline enterprises to function with a commercial orientation. 
However, government of Vietnam (GVN) officials expressed during 
meetings that their overriding concern was to prevent the sale of 
state assets too cheaply to strategic investors so that Vietnam 
became "Russia with its oligarchs." 
 
¶5. (SBU) To address this concern, the Prime Minister issued Decree 
#109 prior to the BaoViet IPO, stating that strategic investors are 
to pay the average IPO auction price.  Decree #109 replaced Decree # 
187, which had allowed strategic investors to receive a twenty 
percent discount from the initial average auction price.  According 
to the Division Head of the Financial Department for Enterprises in 
the Ministry of Finance, the twenty percent discount had attracted 
investors who were not "strategic" in intent but merely seeking to 
take advantage of the discount for a quick turn-around in sale and 
profit-taking, such as was seen during IPOs of Chinese SOEs. 
According to International Finance Corporation (IFC) Country Manager 
Sin Foong Wong, Decree #109 was also motivated by a desire to take 
advantage of the rising stock market and to maximize equitisation 
proceeds.  According to World Bank Chief Economist Martin Rama, 
equitisation auctions were expected to serve as a price discovery 
mechanism and thus guide the price charged to strategic investors. 
 
 
¶6. (SBU) The GVN itself seems engaged in an internal debate on 
whether to embrace strategic investors.  For instance, the Ministry 
of Finance (MOF) official in charge of the equitisation process told 
us that they were thinking about floating a few trial IPOs where 
strategic investors would be welcome. However, the Office of the 
Government (akin to the Prime Minister's Chief of Staff) 
categorically ruled out this option for the foreseeable future. 
 
¶7. (SBU) It is unclear what would be the share price if strategic 
investors end up taking part in future IPOs.  Director Le Xuan Nghia 
(Banking Development Strategy Department of the State Bank of 
 
HANOI 00001561  002 OF 003 
 
 
Vietnam) gave the most direct answer, stating that the government 
will have strategic investors bid against each other to determine 
their share price. 
 
¶8. (SBU) Finally, a former SBV employee, now at HSBC, noted that the 
GVN is also considering a completely different model for 
equitisation. Instead of selling shares to strategic investors at a 
discounted price or using an average of auction prices, all 
investors (except employees) would be charged the same price. The 
cost savings from not granting a discount would be used to pay for 
technical assistance that would have otherwise been sought from the 
strategic investor. 
 
EQUITISATION REMAINS A PRIORITY 
------------------------------- 
 
¶9. (SBU) Officials at the MOF outlined the government's goals and 
concerns for equitisation: 
 
- equitisation should not be carried out merely for the sake of 
equitising to avoid the risk of state asset sales enriching only a 
few with little benefit to the larger population; 
 
-  equitisation proceeds should be sufficient to address the SOEs 
legacy problems, such as bad debt and redundant workers, as well as 
fund necessary investment activities. 
 
They emphasized that share sales to employees at discounted prices 
(currently 40 percent) will be an integral component of equitisation 
as a form of worker protection.  Also, they noted that while initial 
offerings of SOEs have thus far taken place only in Vietnam, 
authorities are seeking to list SOEs internationally. 
 
¶10. (SBU) IFI representatives and private sector participants are 
confident that equitisation remains a top government priority, but 
many acknowledged that the offerings may need to proceed more slowly 
due to fear that (1) an oversupply of shares will drive down prices, 
and (2) SOEs are unprepared.  World Bank Economist Taka Akamatsu 
noted that many SOEs managers are pushing for equitisation even 
though SOEs are not ready, as managers are seeking to profit from 
their 40 percent discounted share price. 
 
¶11. (U) Government officials were consistent in conveying that 
equitisation remains a top priority.  They recounted the numerical 
goal for the equitisation program: to equitise 71 large SOEs in 
every sector by 2010.  (Comment: Government targets on equitisation 
are widely viewed as unrealistic, but do serve as signaling devices 
to convey the government's prioritization for equitisation.) 
Nonetheless, analysis of the equitisation process continues.  During 
a meeting between the ExIm Bank President and the new SBV Governor 
on August 22, the Governor admitted that the equitisation of 
Vietcombank was being delayed until the end of 2007. 
 
¶12. (U) As to whether the government decides to move forward with 
the technical assistance model remains to be seen.  Technical 
assistance, whether provided by aid agencies or private sector 
management consultants, is unlikely to have the same long-term 
effect as engaged, strategic shareholders in terms of creating 
permanent improvements in managerial habits and culture.  All eyes 
are now on the upcoming equitisation of Vietcombank, the second 
largest SOCB by assets and what will be the government's largest 
equitisation to date, as an indication of how authorities will 
proceed forward with their equitisation program. 
 
COMMENT: GROUNDS FOR IMPROVEMENT? 
--------------------------------- 
 
¶13. (SBU) BaoViet's equitisation was to serve as a flagship example 
of Vietnam's ability to carry out its equitisation program with 
large SOEs.  Its failure embarrassed the GVN and prompted a review 
of Vietnam's equitisation process.  The intent of Decree #109, to 
avoid a "Russia oligarch" situation, could be considered a positive 
testament to Vietnam's desire to avoid the mistakes made by other 
countries moving towards a market economy. 
 
¶14. (SBU) Intent notwithstanding, the decree requiring strategic 
investors to pay the average auction price is problematic for 
several reasons.  First, the thinness of Vietnam's stock market, 
lack of proper financial information disclosure, and short-term 
perspective of most bidders (seeking to immediately sell the 
purchased shares) makes the auction a poor price discovery 
mechanism.  Second, strategic investors are not likely to agree to 
any "market price" as they would seek a risk premium for bearing 
 
HANOI 00001561  003 OF 003 
 
 
greater risks than the average investor (for example, agreeing to 
hold shares a minimum of 3-5 years.)  Lastly, by bringing in 
strategic investors only after an auction, the investors' ability to 
make managerial reforms at the equitised company may be limited, 
making the auction less lucrative for the government sellers.  END 
COMMENT. 
 
¶15. (U) Susan Chun, Treasury Desk Officer for Vietnam, collaborated 
in the drafting of this cable based on her meetings in Hanoi during 
the week of August 6 to 12. 
 
MICHALAK